Stocks to Follow (and Buy) for 2020
The 2010s were kind to the average Wall Street investor, as the decade is primed to go down as the first uninterrupted full-decade bull market in history. The 2010s, among other things, was characterized by the rapid rise of “Big Tech,” which brought Wall Street its first trillion-dollar empires.
The U.S.-China trade conflict still looms large entering the 2020s, but the U.S. economy, for the moment, continues to steadily improve. While not every year can see the record highs and 20%-plus gains of 2019, a portfolio of good companies with solid prospects and a handful of defensive-minded names seems as prudent looking forward.
Entering 2020, the valuable companies traded on U.S. exchanges are in part tech stocks. The specter of antitrust regulation is real, but the idea that regulation will bring Silicon Valley to its knees is a fantasy. In another 10 years, technology will play an even larger role in everyday life and markets than it does today, so investors may as well come along for the ride. Without further ado, here are 10 of the best tech stocks to buy for 2020.
Plus, with interest rates still near historic lows, the stock market remains an essential wealth-creation tool.
Here are some of the best stocks to follow (and buy) for 2020.
Microsoft Corp. (MSFT)
One of the first trillion-dollar companies on earth, Microsoft is still enjoying the long-term benefits it cemented in the ’90s. The Redmond, Washington-based software giant is still one of the best tech stocks to buy for 2020, a quarter-century after Windows 95 introduced millions to personal computers. That proves MSFT has longevity, but the company has also invested its cash brilliantly: it got into tablets with the Surface, video games with Xbox and social networks with its LinkedIn acquisition. The Windows upgrade cycle allows for guaranteed recurring revenue, as does the brilliant decision to make Microsoft Office a cloud-based subscription product. Azure, its cloud computing division that is second only to Amazon.com’s (AMZN) AWS by market share, highlights MSFT’s growth prospects, with revenue up 59% last quarter.
Dell Technologies (DELL)
Another well-known business from the 1990s that helped PCs go mainstream is Dell, which, after evolving and diversifying, is attractive enough to be one of the best tech stocks to buy for 2020. Dell isn’t just a computer company anymore: it has tentacles in the data center, storage, servers and the cloud – a diversified portfolio of modestly growing business units. Its commercial PC business has been picking up steam recently, driving operating income growth of 65% last quarter in the client solutions group. Most importantly, Dell acquired a roughly 80% stake in VMWare (VMW) in 2018, which is valued at $60 billion. Dell’s stake is worth about $48 billion, yet trades at a $36 billion valuation. Trading for just 9 times earnings, eventually Wall Street will realize this dramatic mispricing.
For a second consecutive year, application software giant Adobe makes the cut as one of U.S. News’ best tech stocks to buy. Through December, ADBE stock is up 35% in 2019, but there’s still long-term upside in Adobe, the company behind the suite of iconic creativity apps that includes Photoshop, InDesign, Illustrator, Acrobat and Premiere, to name a few. Simply put, this is must-have software for many industries and professionals, and Adobe’s cloud-based software-as-a-service model helps bring high-margin recurring revenue – an investor’s dream. At $150 billion, ADBE is still growing sales by about 20% a year. Keep in mind, ADBE might not insulate you from short-term volatility like the best blue-chip stocks can, but tech stocks simply tend to be higher risk, higher reward.
Communications and media giant AT&T also has an entrenched business, but it isn’t growing like an Adobe or Microsoft. Across the U.S., AT&T boasts more than 100 million U.S. customers paying for TV, mobile or broadband services. After acquiring WarnerMedia the company became an entertainment empire; it’s the parent company of Hollywood studio Warner Bros., DC Comics, HBO, CNN, TBS, TNT and many more. Trading at 10.6 times forward earnings and paying a sustainable 5.3% dividend, AT&T brings relative stability to the list of the best tech stocks to buy for 2020. It expects about $28 billion of free cash flow in 2020.
Being one of several tech names on U.S. News’ list of best stocks to buy for 2020, Facebook had to go down as one of the best tech stocks to buy for 2020 as well. It trades for 32 times earnings, but that’s not unreasonable from a company that’s expected to grow profits by 42% next year. Although Facebook boasts roughly 2.5 billion monthly active users, it’s still growing that figure by about 8% annually. Almost 2.8 billion people use either Facebook, WhatsApp, Instagram or Messenger at least once a month. Even if a Democrat were to win in 2020 and push for the breakup of Facebook, investors might still benefit as Wall Street would be better suited to fully value each business segment.
You’ll be forgiven if you haven’t heard of STMicroelectronics, a $22 billion Swiss semiconductor company. But for investors currently digging around for the best tech stocks to buy, STM is a contender. Its chips help power some interesting end-markets, including the automotive sector, where STM chips will help the accelerating adoption of electric vehicles. STM also makes wireless charging, touch and display products for smartphones, as well as data center power solutions needed for the transition to 5G. Trading for a lowly price-earnings-growth (PEG) ratio of 0.45, analysts expect earnings per share to grow 49% annually for the next five years, making its P/E of 22 look like a steal.
Alibaba Group Holding (BABA)
If you’re in the habit of seeking out the top tech stocks to buy, odds are you’d like one or two of them to provide some impressive growth. Alibaba, despite already pulling down over $70 billion annually in revenue, still qualifies as an out-an-out growth stock as the closest analogue to Amazon in China. Alibaba’s top line is growing faster than Amazon’s, however, surging 40% last quarter. Unlike Amazon, whose cash cow is its cloud computing division despite being dwarfed in size by its retail division, Alibaba’s profit center is its core e-tailing division, using those earnings to fund other business endeavors, which now include a booming cloud computing business of its own as well as a thriving entertainment division.
IAC/Interactive Corp. (IAC)
New York, New York-based IAC is an $18 billion media and internet company that operates almost like a publicly traded incubator. Media legend, former CEO and current IAC Chairman Barry Diller has created enormous wealth for shareholders, guiding the stock from $2 a share in 1995 to $215 at the time of this writing. Management’s bold and rewarding philosophy has resulted in the cultivation and spin-off of companies like Expedia (EXPE), Lendingtree (TREE) and Live Nation (LYV). The next to be spun off is online dating giant Match Group (MTCH), which IAC owns over 80% of. IAC’s stake in MTCH and ANGI Homeservices (ANGI) alone is worth more than all of IAC at current valuations. That implies IAC holdings and fast-growing media companies Vimeo and Dotdash are worth less than nothing, which can’t be true. This leaves an arbitrage opportunity for 2020.
Medifast (ticker: MED)
Health and nutrition products company Medifast specializes in weight loss products, selling bars, meals, shakes and healthy snacks, offering a variety of different plans, 30-day kits and the like. Unfortunately for shareholders, MED’s stock price started slimming down in 2019, too, losing 30% through early December as tech issues on its website coincided with deceleration fears. That’s great for opportunists, who can now own shares of the health retailer, which also pays a 5% dividend, for just 14 times earnings. An activist investor that formerly owned a large stake agitated for changes, then sold for huge profits (Engaged Capital LLC) is back for another bite. The fund typically lobbies for board seats and may seek to secure an acquisition.
Nexstar Media Group (NXST)
Sometimes well-run companies in declining industries like broadcast TV – especially if they boast real assets, established viewership and impressive reach – can be deceptively compelling investments. Nexstar is America’s largest local TV and media company, owning 197 stations in 115 markets that cover about 63% of U.S. television households. Don’t be too quick to knock the business model, which almost singlehandedly made NXST one of the best stocks to buy for 2020. The cash cow is retransmission fees, which Nexstar charges to cable and satellite companies for the right to carry Nexstar’s signals. In 2010, those fees totaled $29.9 million, accounting for just 9.1% of company revenue. In 2018, they accounted for 40.5% of revenue – and clocked in at $1.12 billion. NXST quietly trades for 6 times forward earnings and pays a 1.7% dividend.
AbbVie, which makes the world’s best-selling drug in Humira, went through much of 2019 on a downswing as the market struggled to cope with a proposed $63 billion takeover of Botox-maker Allergan (AGN) at a steep 45% premium. As expected, however, the indignant stance the market initially took to the AbbVie-Allergan tie-up softened, and shares are coming into 2020 well off their 52-week lows. For investors sick of ringing in another new year with interest rates in the gutter, ABBV pays a 5.5% dividend and trades for just 8.8 times forward earnings. The spate of insider buying between June and September, when ABBV traded between $64 and $71 per share, proved a prescient bullish signal, but AbbVie still looks like one of the best stocks to buy for 2020 in the $80s.
NMI Holdings (NMIH)
Mortgage insurer NMI Holdings isn’t the sexiest stock on the block. But the cliché “never judge a book by its cover” earns its keep with NMIH, which grew revenue from $19 million to $275 million in just five years. Shares rallied 80% in 2019 alone, and at 10 times forward earnings and a price-earnings-growth ratio of 0.48, NMIH still seems cheap. This risk-reward profile is precisely what makes it one of the best stocks to buy for 2020. NMI’s industry seems poised to keep growing: homebuyers who can’t afford a 20% down payment typically have to buy mortgage insurance from somebody like NMIH, which in turn pays the lender in case of default. As long as underwriting remains sound, NMIH appears poised to cruise higher, collecting monthly payments from homeowners until they own 20% of their home.
Healthpeak Properties (PEAK)
Technically, Healthpeak Properties is a real estate investment trust, or REIT, but it trades just like a stock. REITs offer exposure to real estate through the stock market, usually pay meaningful dividends and always offer tax advantages for dividend payments. As for PEAK, its focus is on high-quality real estate in the health care area, specifically life sciences, medical offices and senior housing units. The 4.3% dividend not only offers solid tax-advantaged income, but PEAK offers two other upsides: it’s not highly correlated with the market at large, and it’s well-positioned to benefit from the aging baby boomer demographic. When the market was plunging in late 2018, PEAK rallied; that sort of resilience is valuable in a portfolio.
Newmont Goldcorp Corp. (NEM)
If you’re the type of investor that likes hunting for homers, NEM likely isn’t your cup of tea. But this gold, copper and silver miner still makes the cut as one of the top stocks to buy for 2020 for the simple reason that it’s attractively valued and a nice theoretical hedge against recession. When the current record-setting bull market inevitably ends, safe haven asset classes like precious metals should be positioned to benefit. With over 65 million ounces of proven or probable gold reserves, having exposure to the soft metal through NEM stock is a level-headed strategy. NEM pays a 1.5% dividend and tends to have little correlation with the wider stock market – an important characteristic for the cautious investor.
British American Tobacco p.l.c. (BTI)
Corporate tobacco kingpin BTI is no favorite of environmental, social, governance (ESG) investors, but that’s far from a death knell for this international so-called “sin stock” behind brands like Camel, Lucky Strike, Newport and Kool. Although BTI added about 21% in 2019 through early December, this constitutes a truly subdued bounce-back from a precipitous fall in 2018 that saw shares hit their lowest levels since 2010 amid worries it was surrendering the vaping market. A sound, still oversold consumer defensive stock that boasts the highest dividend on this list (6.8%), BTI is another pick that can offer hard-to-find income and insulation from the worst of any downturn.
Universal Insurance Holdings (UVE)
Property insurer Universal Insurance Holdings is a little-known small-cap stock focusing primarily on the Florida market. Although there’s greater risk associated with a smaller company like UVE when compared to British American Tobacco, at current levels it seems the potential reward should more than compensate for that. If analyst expectations for earnings of $3.30 per share in 2020 hold sound – and assuming no fluctuation in its low P/E ratio of 10.8 – UVE stock would reach $35.57 by early 2021. These modest assumptions imply upside of roughly 24% from current levels.
Acuity Brands (ticker: AYI)
Acuity provides lighting and building management solutions and services. Last quarter, Acuity reported an 11.6% decline in sales and a 16% drop in volumes. Trade war uncertainty and pricing pressures from Chinese competitors have been weighing on margins. Acuity shares are down 49% overall in the past five years, but the stock’s conservative valuation relative to its peer group suggests significant upside in the event of a cyclical recovery in the lighting market. AYI stock offers an attractive valuation, trading at a 39% discount to its five-year average forward earnings multiple.
Tapestry is a global leader in affordable luxury handbags and is the parent company of Coach, Kate Spade and Stuart Weitzman. U.S. handbag sales have been pressured for years, including a 20% drop in the first eight months of 2019, according to NPD. However, Coach sales have been solid, up 1% last quarter. Despite the pressures, Coach remains a market share leader in a highly profitable business and generates roughly 70% gross margins. TPR stock recently traded at around a 39% discount to its five-year average forward earnings multiple.
CBS Corp. (CBS)
In August, CBS and Viacom (VIAB) announced they will once again join forces after the two companies separated in 2006. Since the merger announcement, CBS stock is down 17%, creating a potential buying opportunity for long-term investors. The traditional TV business remains challenged, but CBS revenue was up 1% last quarter on the strength of direct-to-consumer CBS All Access and Showtime Now subscription growth. CBS’s TV ratings are also holding up well relative to peers. CBS stock trades at around 7 times forward earnings estimates, roughly a 39% discount to its five-year average.
CommScope Holding Co. (COMM)
CommScope is a leader in antennas, cabling and other connectivity equipment for enterprise customers. CommScope shares are down 23% in the past six months, and the company’s most recent earnings report revealed another 15% drop in revenue. The company’s network and cloud segment revenue was particularly weak, down 29.2%. Despite the cyclical headwinds and trade war pressures, CommScope generated $497 million in free cash flow in the third quarter, and hyperscale sales doubled compared to a year ago. COMM stock is currently trading at roughly a 38% discount to its five-year forward earnings multiple average.
American Airlines Group (AAL)
American Airlines shares have been grounded in the past year, falling more than 20%. However, a booming 2020 economy could be good news for American. After investing heavily in modernizing its fleet in recent quarters, management recently said the update is nearly complete. The younger fleet should help American reduce maintenance and fuel costs, boost margins and devote more cash flow to paying down debt. With a forward earnings multiple of around 6, AAL stock has the lowest valuation of all the stocks on this list and is trading at a 22% discount to its five-year average.
Global motorcycle brand Harley-Davidson had a difficult few years. Shares are down 48% in the past five years due to sales declines and the company’s inability to connect to younger consumers. Harley has also said trade war tariffs may force production overseas. Harley is on track for its fifth consecutive year of unit sales declines in 2019. Fortunately, international retail sales were up 2.7% and emerging market sales were up 5% last quarter. HOG stock is trading at about a 14% discount to its five-year average forward earnings multiple.
Urban Outfitters (URBN)
Mall retailers have been under pressure from e-commerce competitors for years, and Urban Outfitters is no exception. Urban Outfitters shares are down 29% in the past year and gross margins dropped 2.1% last quarter. Fortunately for investors, the company has aggressively been building its online presence, and roughly 40% of the company’s sales are now generated online. In addition, about half of the company’s sales come from exclusive brands and sourcing, which differentiates it from other retailers. URBN stock is trading at a 14% discount to its five-year average forward earnings multiple.